Financial KPIs: critical indicators for measuring a company's performance

Posted on Aug 23, 2023 at 10:08 PM

With the benefit of the financial KPIs, the company's financial division can track its growth, test its performance and analyse it to test its unique and outstanding progress, ensure its continuity, and avoid economic bottlenecks.

What are the financial KPIs? And what are these indicators and their most important measures? That's what we'll recognise in the following article.

What are the financial KPIs?

Key performance indicators (KPIs) are measures and indicators that provide insights and perceptions of the company's operational and financial strength to identify aspects that need improvement. They measure the different types of data over a given time to determine the success of the company's work.

The professional guide to building KPIs provides insight into most KPIs, which are vital tools that describe relationships between two or more types of concrete and measurable company data.

Key performance indicators are more robust when used to assess and analyse a company's trends and time frame for achieving them. Such as measuring progress against objectives or comparing the company's business with comparable companies are more valuable when used with other types of KPIs to develop a more complete perception of the company's business.

Financial KPIs have high-level standards and measures associated with a specific financial ratio or value that measure all the company's financial information and statements in general, including profits, expenditures, and revenues. Focus on analysing percentages and relationships derived from the company's accounting statements.

• Most financial KPIs are into five categories according to the type of data they measure:

• Key profit performance indicators: measures associated with earnings, such as net profit margins and gross profit.

• Key performance indicators for liquidity: measures that measure everything related to liquidity, such as the rapid and current ratio.

• Key performance indicators of efficiency: measure everything related to a company's efficiency, such as stock turnover.

• Key performance indicators for evaluation: measures for valuations, such as earnings per share or price-to-profit ratio.

• Key performance indicators of impact: measures that determine the amount of the company's impact on data, such as return on equity (shareholders) and debt-to-equity ratio.
  
  

Why are financial KPIs important in business?

Financial KPIs can warn lights on car dashboards. These can help leaders track a company's financial performance and leadership and identify underlying problems without diving into what's happening under the hood.

These indicators can determine whether operations are going, whether significant changes in project performance or warning signs exist and whether financial KPIs help achieve corporate goals.

What are the main KPIs used in the business?

The following list illustrates a set of best examples of financial KPIs adopted by institutions and stakeholders to measure, control and understand financial data within the organisation. Registration in one of the Budgeting training courses in Dubai is a better explanation of all these indicators and their uses than:

• Gross profit margin:

It is a measure of profitability without withholding overheads. This indicator refers to the profit ratio as a percentage after subtracting the cost of goods and goods sold (price of sales) from the company's total revenue.

So that sales costs do not include operating expenses, interest, or taxes.

• Net profit margin:

This indicator considers the net profit ratio divided by income as a percentage after all expenditures subtracted from net profit, including sales costs, operating expenses, taxes, and interest.

• Operating Capital:

This indicator measures the operating liquidity of the business, which uses finance day-to-day operations and is equal to the roll-out product of the current assets and liabilities.

• Current ratio:

This ratio indicates that the Company can meet its short-term financial obligations and pay them over a year, for example, by dividing its current assets over its current liabilities.

• Fast Ratio:

This ratio measures the company's ability to commit to paying its short-term liabilities by converting its assets into liquidity. It is used in high-liquidity commercial assets only, such as cash and negotiable securities,

It should be noted that some of the assets in circulation cannot be cash as inventory. 

So, the quick ratio equation is the ratio between the assets in circulation and the liabilities in circulation after the inventory of the assets in circulation is released.

• Leverage:

They are also known as equity multiplier, a financial strategy based on leveraging money to buy new assets. Increase invested capital and open new deals because all help finance from equity. 

There will be no doubling of invested capital, so the leverage equation equals the result of dividing total assets by total equity.

• The ratio of debt to property rights:

This ratio measures how much a company can finance itself by relying on equity compared to debt. It reflects whether equity can cover all debts in the event of any imbalance or decline in business; the equation reflecting this indicator is the total debt on total equity.

• Stock turnover rate:

An efficiency ratio indicator measuring the number of times a company has been able to sell its entire inventory during each accounting period.

About indicating whether the company has excess inventory relative to its level of sales. Which is equal to dividing the cost of sales by the average total start and end inventory.

• Total asset turnover:

It is also an efficiency ratio that measures the company's efficiency in using its resources and assets to generate revenue. The high turnover ratio is indicative of the company's better performance. The gross turnover equation divides income by the average total rudimentary assets and total end assets.

• Return on equity:

This indicator indicates if the company can use equity investments to earn more profit for investors and shareholders. 

 A profit ratio is measured by dividing the net profit by the average total primitive and final equity.

• Operating cash flow:

Measuring the cash earned due to business operations, currency may be favourable for any available process development or unfavourable. 

i.e. requiring more financing to maintain current operations; this indicator is in a company's cash flow statement.

Concluding,

Everything is fine and good when it comes to financial KPIs. The company's indicators should be compared to those of previous years or competing companies operating in the same industry to determine whether the company's financial performance is improving or deteriorating and how it works for others.